A strong first quarter

European equities: Positive returns

European equities – led by defensive sectors – delivered positive returns, while cyclicals underperformed. Italy was the best-performing country, posting a positive performance in most sectors except banks. The French market benefited from the good shape of luxury stocks while the German suffered from the Bayer trials and pressure on the auto sector, weighted by rumours around protectionist measures coming from the US.

Trade talks between the US and China continued after an extension of the 1st March deadline, while Brexit will be postponed, depending on whether the agreement with the EU is (or not) adopted by the British Parliament. The earnings season showed disappointing 2018 figures followed by cautious guidance for this year while profit-warnings were issued by companies such as Infineon and Osram. They all mentioned slowing demand in China as one of the main culprits. Overall, the first quarter ended positively, with global equity markets showing a strong performance.

We are positive on European companies with a more cyclical bias. As a result, we took some profit from our Consumer Staples and Health Care positions. Conversely, we increased our stake in Capital Goods, mainly towards companies exposed to China and the euro zone, while keeping our ‘overweight’ exposure in Financials (mainly retail banks).

US equities: Rather supportive economy

Global markets continued their upward trajectory, with their best quarterly performance in a decade.

Concerns around global growth took a back seat as investors turned their attention to the Federal Reserve’s dovish commentary. The Fed continued to over-deliver against already very dovish expectations, with most FOMC participants now expecting zero hikes this year (down from a median projection of two hikes last December) and with a more-accommodative-than-expected statement on their balance sheet. Hopes of a resolution to the US-China trade war also provided support to global equities

We are constructive on US equities, with a more positive stance on cyclicals vs defensives, as the economy is still rather supportive. As a result, we reduced our Consumer Staples exposure to ‘underweight’ while remaining ‘overweight’ IT (mainly semi-conductors). We kept our ‘neutral’ position in Industrials (but positive on Capital Goods), driven by hopes of a resolution to the US-China trade war.

Emerging equities: Dispersed Performance

Following a strong start to the year, Emerging Market equities posted a marginally positive return in March.

EM equities underperformed developed markets in March and YTD, despite a rally of almost 10% over the quarter. Among regions, LatAm and EEMEA were a drag on Emerging Market performance, while Asia showed a positive return. The latter added positively to EM performance on a more-dovish-than-expected Fed, positive news around the US-China trade talks and China’s fresh stimulus.

Add to this the MSCI announcement of a larger-than-expected inclusion of the Chinese local A-shares in their indices, and it is no surprise that China continued its strong YTD performance, gaining 2.44% in March – its biggest quarterly gain since 2Q09.

Also, India was one of the best market performers in Emerging Markets in March, due to positive macro variables and investors hoping for a Modi-led BJP victory in the coming elections. Recovery in tech supported Taiwan but less so Korea, suffering disappointing earnings, while the elections in Thailand had no meaningful market impact.

In EMEA, Turkey was down, as renewed volatility in the lira prompted equity investors to sell ahead of the local elections. Weak activity data in Brazil was exacerbated by slow progress in the pension reform bill as a result of tensions between the President and Congress that worried investors.

Towards the end of the month, an inversion of the US yield curve (a possible indication of a future US recession) added some uncertainty while leading to profit-taking among global investors. Over the month, the Indian Rupee was the best-performing currency, thanks to persistent foreign fund inflows, with the Brazilian Real the worst performer. Oil prices continued their uptrend on the back of supply cuts by OPEC+.

Sector-wise, Asian Real Estate was the best-performing sector in EM in the wake of the benign policy outlook, while Industrials lagged.

We maintained our ‘overweight’ exposure in China, driven by a dovish Fed, government stimulus and the gradual weight increase of local A-shares in the MSCI. We remained constructive on Brazilian equities despite having taken some profit after a strong rally and scepticism on pension reform, while maintaining our positive stance on Healthcare, Industrials and Materials.